What is a depreciation expense?
Depreciation expense represents the gradual allocation of the cost of a long-term tangible asset over its useful life. Businesses spread the expense over multiple accounting periods to reflect how the asset is used to generate revenue over time.
What is a depreciation expense?
A depreciation expense is any ordinary and necessary business cost that allocates the cost of a tangible capital asset, such as equipment, vehicles, or buildings, over the periods in which it provides value. Depreciation accounts for wear and tear, aging, or obsolescence of assets and ensures expenses are matched to the revenues they help produce. Depreciation expense appears on the income statement, while the accumulated depreciation is recorded on the balance sheet.
How to categorize depreciation expenses
- Record depreciation under Operating Expenses on the income statement.
- Track the asset’s original cost as a Fixed Asset on the balance sheet.
- Record Accumulated Depreciation as a contra asset account.
- Use an appropriate depreciation method (such as straight-line or accelerated methods).
- Maintain depreciation schedules and asset records for audit and tax purposes.
Examples of depreciation expenses
- Office equipment, such as computers and printers.
- Machinery and manufacturing equipment.
- Business vehicles.
- Furniture and fixtures.
- Buildings and leasehold improvements.
- Technology hardware used over multiple years.
Tax implications for depreciation expenses
- Depreciation expenses are generally tax-deductible, spreading deductions over the asset’s useful life.
- Businesses may qualify for accelerated depreciation methods, such as Section 179 or bonus depreciation.
- Assets must be used for business purposes to qualify for depreciation deductions.
- Personal use of depreciated assets must be prorated.
- Depreciation is reported on business tax returns using the applicable IRS forms and schedules.
